Vendor take-back mortgages, explained

General information, not tax or legal advice. The numbers here are illustrative. Talk to your lawyer and accountant before you act on them.

What it is

A vendor take-back mortgage (VTB) is a loan from the seller to the buyer, secured by a mortgage on the property. The buyer pays part of the price at completion and pays the rest to the seller over time, with interest.

Often the VTB sits behind a bank’s first mortgage, as a second mortgage. It works on homes, commercial property and business sales with real estate in them.

When it helps a buyer

• The bank will lend a little less than you need.
• You want to buy now and refinance later, once the property’s income or your own finances improve.
• The property is unusual and harder to finance.

When it helps a seller

• It brings in more buyers, especially in a slow market.
• It can support a better price or a faster sale.
• You earn interest on the amount you lend.
• For some sellers it can spread the gain over a few years for tax. Ask your accountant whether a capital gains reserve applies to you.

The risks

For the seller: the buyer may not pay. If they default, getting the money back can take time, legal costs and a court process, and a first mortgage lender gets paid ahead of you. Check the buyer’s finances as carefully as a bank would.

For the buyer: it is still debt. Payments, the term and what happens when it comes due all matter. Many VTBs are short, so plan how you’ll pay it out or refinance.

For both: the main lender has to agree. Some lenders won’t allow secondary financing, or won’t count a VTB toward the down payment. Ask early.

Terms to agree

• The amount, interest rate and how interest is calculated.
• The term, the amortization and the payment schedule.
• Whether the buyer can prepay without penalty.
• What happens on default or if the property is sold.
• Whether it is first or second in line behind the bank.

Rates and terms are negotiated case by case, so there is no standard number.

How it is documented

The terms go into the contract of purchase and sale. At completion, the lawyers prepare the mortgage and register it on title at the Land Title Office. Each side should have their own lawyer.

Questions people ask

What is a vendor take-back mortgage?

A loan from the seller to the buyer for part of the price, secured by a mortgage registered on the property.

Is a VTB first or second mortgage?

Usually second, behind the bank’s first mortgage, though it can be first if there’s no other lender.

Will my bank allow a vendor take-back?

Some will and some won’t, and some limit how it can be used toward the down payment. Ask your lender before you write the offer.

What interest rate should a VTB have?

It’s negotiated between buyer and seller. Your lawyer and accountant can help you think through what is fair and what the tax effects are.

Who registers a VTB in BC?

The lawyers or notaries prepare the mortgage, and it is registered on title at the Land Title Office at completion.